The report was commissioned to examine a $6.2 billion credit derivatives trading loss last year at J.P. Morgan’s
JPM, -0.76%
London investment office. The loss was partly attributed to a trader, Bruno Michel Iksil, dubbed the “London whale” for his large positions in credit derivatives. The report notes that the current status of the losses is unclear because J.P. Morgan dismantled the portfolio late last year, moving some funds to its investment banking unit.

It includes dozens of examples in which trader warnings were ignored while risk managers at the institution appeared unaware of losses. It adds that the bank’s chief government regulator appeared oblivious in many instances or was denied critical information.

Levin noted that the bank breached key risk limits 170 times in the first three months of 2012, followed by 160 breaches in the next month, April. The report also said a J.P. Morgan internal investigation into the losses was insufficient.

“The bank disregarded the warning signals of this huge ramp up in risk, they allowed the CIO to raise the risk limit, manipulate the risk measurement models to continue trading despite all of the red flags,” Levin told reporters in a briefing on the report.

Levin told reporters that he will decide after a hearing scheduled for Friday, where top regulators and J.P. Morgan executives are scheduled to testify, whether it will push the Justice Department to investigate the firm. Dimon wasn't called to testify on Friday and Levin defended the decision, arguing that he plans to hear from the individuals with the most knowledge of the trades.

He said Dimon’s involvement was limited and included dozens of emails that went to him, but he wasn't the one who acted on them.

However, the report does have one example showing that Dimon intentionally sought to cut off regulators from critical daily profit and loss trading data at the investment bank.

According to the report, in late January, 2012, as losses in the CIO office were increasing, the Office of the Comptroller of the Currency, the bank’s chief regulator, said Dimon ordered the bank to stop providing a daily investment bank profit and loss report to the agency, because he believed it was too much information to provide to the OCC.

However, Douglas Braunstein, J.P. Morgan Chase’s chief financial officer at the time, restored the daily report soon afterward at the OCC’s request. But, according to the OCC bank examiner, Scott Waterhouse, “Dimon reportedly raised his voice in anger” at Braunstein and disclosed that he had ordered the halt to the reports. Dimon said the OCC didn't need daily profit and loss figures for the investment bank, according to the examiner.

The report notes that the bank’s chief investment office and its investment bank assigned different values to identical credit derivatives holdings, raising warning flags for regulators.

Missed warnings

Meanwhile, there were many examples of trader warnings going unheeded. In one recorded conversation from March, Iksil, the “London whale,” told Julien Grout, a junior trader, that their supervisor, Javier Martin-Artajo, was expecting a reworking of their calculation of losses. In the email Iksil said “I can’t keep this going …. I think what he’s [Javier Martin-Artajo] expecting is a re-marking at the end of the month …. I don’t know where he wants to stop, but it’s getting idiotic.”

At one point in March, Iksil characterized the huge losses as “hopeless” and he predicted that “they are going to trash/destroy us” and “you don’t lose 500 million without consequences.”

Separately, in February, 2012, one of the bank’s risk metrics, known as the comprehensive risk measure, or CRM, warned that the institution’s synthetic credit portfolio risked incurring a yearly loss of $6.3 billion. However, Peter Weiland, the former head of market-risk at J.P. Morgan, forwarded the results to Martin Artajo, the head of the investment office’s equity and credit trading unit, stating that the numbers “look like garbage...”

Levin said that he may hold further hearings if necessary. However, Dimon already has testified about the losses before Senate and House committees last year and was interviewed privately by the committee. (Responding to the London Whale failure, J.P. Morgan’s board in January hit Dimon with a 50% pay cut for 2012).

Instead the big bank’s former chief financial officer, Braunstein, and its former chief investment officer, Ina Drew, are set to testify.

The report also argues that a key risk model change masked the risk increase in the investment office in a way that likely fended off potential questions from investors. In a May 10, 2012 conference call where J.P. Morgan first disclosed the losses, Dimon, also first disclosed to investors that the firm changed its value-at-risk model estimate from $67 million at the beginning of the first quarter to $129 million at the end. Levin said he is seeking new transparency requirements in response to the disclosure delay.

Regulatory failure

Regulators also came under fire in the report. The report noted that the OCC only received monthly, not daily, profit and loss data about the bank’s chief investment office, which had a $350 billion portfolio. The panel obtained the information about the office, which showed that it was profitable until 2012, but lost $100 million in synthetic credit derivatives in January, another $69 million in February and another $550 million in March, eventually rising to billions of dollars in losses.

The criticism comes after the OCC and Federal Reserve in January issued two orders against J.P. Morgan, requiring the big bank to take steps to improve its financial and internal audit systems, in addition to a number of risk-management improvements. Read about J.P. Morgan facing post-whale enforcement actions

It’s unclear whether the report will have any policy impact. Levin introduced a series of recommendations for reform, including the approval of a tough Volcker rule, which seeks to limit speculative trading by big banks by prohibiting them from trading stocks and derivatives with their own money.

Levin told reporters that a key provision in the proposed Volcker rule that permits investment hedging on a “portfolio basis” is inconsistent with the legislation he wrote. He said hedging in connection with a specific asset held by a bank is permitted, based on the statute, but that the kind of “hedging bet” made by J.P. Morgan should not be permitted.

“You cannot allow the banks’ argument that they can hedge their entire inventory, with global hedges,” he said. “They have to identify what is being hedged against. You cannot allow the kind of manipulation, the kind of actions created here by the bank, to be accepted in the name of hedging.”

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